Maryland Light, a U.S. light fixtures manufacturer, is considering an investment in Japan. The dollar cost of equity for Maryland Light is 13.34%13.34 \%. You are in the corporate treasury department, and you need to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates. The risk-free interest rates on dollars and yen are rS=5.64%r_{\mathrm{S}}=5.64 \% and rY=1.28%r_{\mathrm{Y}}=1.28 \%, respectively. Maryland Light is willing to assume that capital markets are internationally integrated. What is the yen cost of equity?


Answered 1 year ago
Answered 1 year ago
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First, let's see the formula we will use to calculate the yen cost of equity which we denote with YCYC

YC=1+RD1+RY×(1+DC)1\begin{align*} YC&=\frac{1+RD}{1+RY} \times (1+DC)-1 \end{align*}

where the risk-free rate dollar RDRD is 5.64%5.64\%, risk-free rate yen RYRY is 1.28%1.28\% and the dollar cost of equity DCDC is 13.34%13.34\%

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